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Busted! 7 Biggest Legal Mistakes You Can Make

Barry Moltz

Getting Small Businesses Unstuck, Shafran Moltz Group

I get small business owners unstuck through speaking , writing and consulting. I am a big technology, antique car and karate enthusiast.

Small-business owners make a lot of mistakes, many of which can get them into trouble. This isn't just about the small, typical disputes with customers, employees, vendors or bankers, but the big mistakes that get them in big trouble with the law. Be warned: The following seven are the most common, and potentially most damaging, mistakes business owners can make.

1. Payroll taxes. Companies are instructed by state and federal authorities to deduct payroll taxes from an employee’s check every payroll period. They are then required to send this money (with the company’s share) to various government agencies on a time period based on the total payroll size. When a small business processes its own payroll, these funds often get “comingled” with its general operating monies. Unfortunately, some owners with cash flow issues spend the money meant for the government and can’t remit payroll taxes on time. This not only gets the government angry, but it’s illegal. The owner is also personally responsible for payment of these taxes. (This tax obligation won't even be discharged in case of business or personal bankruptcy!)

Solution: Use a payroll service that automatically deducts this money from the employees' pay and the company’s share from its bank account. This should be done even if there is only one employee. Services like Paychex, ADP, and Sure Payroll are incredibly inexpensive for the benefit they provide.

2. Sales and use taxes. If a business collects sales tax from customers for their state, it also needs to remit this to the government on a predetermined basis (monthly, quarterly or annually). All the warnings of personal liability with payroll taxes apply to this type of tax as well. In addition, if a company gets a product and does not pay sales tax, many states charge a use tax for that item. In other words, the company needs to send the sales tax to the state themselves even if the selling company did not charge them initially.

Solution: Track these customer sales and company purchases carefully and segregate the money into a separate account for payment.

3. Sexual harassment or discrimination of employees. This happens frequently at small businesses that have few human resource policies as they rapidly grow. In addition, employees spend long hours together in unstructured environments. Accusations made against managers or between employees are common and can produce huge legal bills that sink a company.

Solution: Be aware of any activity that can be misconstrued as sexual harassment. Try to keep as many business activities as possible with multiple employees present. Meet in a public place if it's just a manager and an employee. Implement an HR manual for the company that has clear guidelines in these areas and train all employees to use it.

4. Classifying all employees as exempt. This means that the company is not paying them on an hourly basis, but a salary regardless of what their job function is. Employment guidelines are very strict in this area. This even becomes more complicated with companies that have flex time.

Solution: Carefully review each job description and match them with exempt and non-exempt guidelines. Only those positions that can be classified as professional or management can be exempted. Remember, if employees are non-exempt, they must be paid for overtime.

5. Classifying workers as freelancers when they are employees. This is another area where many small-business owners make a mistake when they try to classify all their working relationships as freelancers so they don't have to include payroll taxes. Guidelines in this area are, again, very strict.

Solution: Review what each person does for the company and if they qualify as being a freelancer. These guidelines include working outside the office, using their own “tools,” not requiring new training to complete the job, and how much direction they need to complete an assigned task. Always issue a 1099 for freelancers.

6. Deducting an employee loan from their paycheck. Many states do not allow any deductions from paychecks except for taxes and benefits.

Solution: Have the employee sign a promissory note witnessed by an attorney and send a check according to the agreed repayment schedule.

7. Not paying the employee his or her last check immediately. Most states are very strict in this area, where employees need to get their final paychecks within weeks even if they have not returned all company property. The required time period differs by state, but it could be as soon as the next business day.

Solution: Don't delay; make it a priority and one of the first things that gets done when an employee resigns, quits or is let go.

Also, with the Affordable Health Care Act affecting many small businesses in 2015, all owners should research these requirements as well.